FCCB BUY BACK – MAKES PERFECT ECONOMIC SENSE

There is now one more “first” which Anil Ambani can add to his already overcrowded cap – his company Reliance Communication would most likely be the first company to announce buy back of its Foreign Currency Convertible Bonds (FCCBs), the first Indian company to do so after RBI relaxed the norms last Saturday.

As per the new norms issues by RBI, companies are now prematurely allowed to buy back their Foreign Currency Convertible Bonds (FCCBs) , financed by the company’s foreign currency resources held in India or abroad. The only conditionality justifying the buy back using foreign currency held in India, including Exchange Earners Foreign Currency Accounts (EEFC) or foreign currency held overseas or raise fresh foreign borrowings, provided there was a minimum discount of 15% on the book value of the FCCB. Companies can also buy back using rupee resources, if there is a minimum discount of 25%, on the book value. The conditionality over ruling all this is that companies will use their internal accruals, which has to be certified by the statutory auditor.

R-Com had issued zero-coupon FCCBs in February 2007, to raise USD 1 billion. The bonds are now trading at a 35% discount to the issue price, meaning, its bonds worth has now come down to US$650 million. And as the RBI has allowed the companies to use internal accruals, this should not be too much of an issue with RCom, as it currently has over Rs.100 billion in cash reserves, which also includes about US$ 600 million worth of investments in mutual funds overseas. And if the other option which the company has, is, to also convert a portion of the rupee reserves into foreign currency for the buyback.

This move to buy back by Rcom is good, as it would help the company reduce its liability and also bring down its forex exposure. Converting the bonds into equity is not a viable option, or rather not workable option as almost all the stocks are today quoted at a huge discount to the conversion price. Another option then would be to raise ECBs which has also been relaxed by the RBI. That too might not come through as no one is today willing to lend, irrespective of the pedigree or the repaying capability. Also, with the dollar now becoming a precious commodity, coming across ECBs would be difficult. And thus this premature buy back is the best possible option available.

The premature buy back does not just reduce the liability, but this would mean that the companies after buying back these FCCBs, would now go for new FCCBs at today’s rates, thus keeping their capex plans intact and at the same time, adjusting their liabilities to current rates. For companies like Rcom and other bigwigs, reducing the capex is not an option – maybe they can postpone but not bring down. And going by all these circumstances, it thus makes more sense to buy back the FCCBs.

Rcom will be the first company to do so, but not the last. Others expected to follow suit at as majority of the FCCBs are today trading at an average discount of 30-70%. Prominent amongst them could be Aban Offshore which has a FCCB of Japanese Yen 11610 million, Aurobindo Pharma of US$150 million, Ashok Leyland of US$100 million, Bajaj Hindusthan of US$120 million, Educomp of US$80 million, HDFC of US$500 million, JP Associates of US$265 million, JSW Steel of US$325 million, M&M of US$200 million.

Suzlon Energy also has a FCCB of US$450 million, but, given its deferment of rights issue and need of internal accruals to buy additional stake in German RE Power and fund the expansion plans, maybe the company might not go for a premature FCCB buy back – unless the company decides to defer the expansion plans and the additional stake buy, which logically makes more sense under the present circumstances.

Another such company which has FCCBs but not enough internal accruals will be Tata Motors. It has a FCCB of US$ 890 million and another FCCB of Japanese yen 11,760 million. Tata Steel too has a FCCB of US$875 crore which could see premature buy back.

All in all, this is a good move by RBI to allow premature buy back of the FCCBs. And in the present circumstances, makes perfect economical sense.

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